Operating Agreement of Lantana Development LLC

OPERATING AGREEMENT


OF


LANTANA DEVELOPMENT LLC


TABLE OF CONTENTS


Page
----


ARTICLE I FORMATION OF LIMITED LIABILITY COMPANY...............................1


ARTICLE II NAME................................................................1


ARTICLE III DEFINITIONS........................................................1


ARTICLE IV PURPOSE.............................................................4


ARTICLE V NAMES AND ADDRESSES OF MEMBERS.......................................5


ARTICLE VI TERM................................................................5


ARTICLE VII PLACE OF BUSINESS AND AGENT FOR PROCESS............................5
7.1 Place of Business................................................5
7.2 Agent for Process................................................5


ARTICLE VIII INITIAL CAPITAL AND ADDITIONAL CAPITAL CONTRIBUTIONS..............5
8.1 Capital Accounts.................................................5
8.2 No Right to Return of Contributions..............................6
8.3 No Interest on Capital...........................................6
8.4 Loans to Company.................................................6
8.5 Additional Members...............................................6
8.6 Failure to Make Capital Contributions............................7
8.7 Transferee Succeeds to Transferor's Capital Account..............7
8.8 Additional Capital...............................................7
8.9 Return of Unused Capital Contributions...........................7


ARTICLE IX ALLOCATIONS.........................................................7
9.1 Allocation of Income, Gains and Losses...........................7
9.2 Allocations in Event of Asset Sale...............................8
9.3 Special Allocations..............................................8
9.4 Tax Allocations..................................................9
9.5 Special Fee Allocation...........................................9
9.6 Consent to Allocation............................................9


ARTICLE X DISTRIBUTIONS.......................................................10
10.1 Distributions of Net Cash From Operations......................10
10.2 Other Cash Distributions.......................................10


ARTICLE XI BOARD OF GOVERNORS.................................................11
11.1 Authority of Board.............................................11
11.2 Appointment of Board; Term.....................................11
11.3 Compensation...................................................11
11.4 Place and Time of Meetings.....................................12


-i-


11.5 Waiver of Notice; Previously Scheduled Meetings................12
11.6 Quorum.........................................................12
11.7 Acts of Board..................................................12
11.8 Participation by Electronic Communications.....................12
11.9 Absent Governors...............................................12
11.10 Action Without a Meeting.......................................13
11.11 Limits of Authority............................................13


ARTICLE XII MANAGER AND VICE MANAGER; CONFLICTS OF INTEREST; INDEMNIFICATION..13
12.1 Manager........................................................13
12.2 Management and Control of the Company..........................14
12.3 Authority of Manager...........................................15
12.4 Restrictions on Authority of Manager...........................16
12.5 Obligations of Manager.........................................16
12.6 Tax Matters Partner............................................17
12.7 Conflicts of Interest; Other Activities........................17
12.8 Reimbursement..................................................18
12.9 Indemnification of Manager and Covered Persons.................18
12.10 Liability Under Other Agreements...............................19


ARTICLE XIII BOOKS OF ACCOUNT AND REPORTS; PROJECT RESERVE....................19
13.1 Books of Account...............................................19
13.2 Accounting Practices...........................................19
13.3 Bank Accounts..................................................19
13.4 Report to Members..............................................19
13.5 Tax Information................................................20
13.6 Tax Elections..................................................20
13.7 Project Reserve................................................20


ARTICLE XIV TRANSFER OF MEMBERSHIP INTERESTS..................................20
14.1 Prohibition Against Transfer...................................20
14.2 Conditions to Assignment.......................................20
14.3 Permitted Pledge...............................................21
14.4 Transfer to Person who is Not a Member.........................21
14.5 Acquit Company.................................................21
14.6 New Members Bound by Agreement.................................21
14.7 Distributions After Transfer...................................22


ARTICLE XV LIABILITY OF MEMBERS...............................................22


XVI AMENDMENT OF AGREEMENT....................................................22


XVII DISSOLUTION..............................................................22
17.1 Dissolution....................................................22
17.2 Distributions on Liquidation...................................23


ii


ARTICLE XVIII DISPUTE RESOLUTION..............................................24


ARTICLE XIX MISCELLANEOUS.....................................................25
19.1 Notice.........................................................25
19.2 Partition......................................................25
19.3 Consent and Waiver.............................................25
19.4 Entire Agreement...............................................25
19.5 Governing Law; Venue...........................................25
19.6 Successors.....................................................26
19.7 Interpretation.................................................26
19.8 Severability...................................................26
19.9 Counterparts...................................................26
19.10 Necessary Instruments..........................................26


iii


OPERATING AGREEMENT OF
LANTANA DEVELOPMENT LLC


THIS AGREEMENT is made and entered into effective as of the _____ day of March, 2000, by and among TAYLOR INVESTMENT CORPORATION, a __________ corporation ("TIC"), and *, A DELAWARE LIMITED LIABILITY COMPANY ("*") (TIC and * are collectively herein referred to as the "MEMBERS").


ARTICLE I
FORMATION OF LIMITED LIABILITY COMPANY


Joel Kaul acted as the organizer to form a limited liability company under the laws of the State of Delaware by the filing of Certificate of Formation for Lantana Development LLC (the "COMPANY") pursuant to the Delaware Limited Liability Company Act, Delaware Code, Title 6, Section 18-101 et seq. (the "ACT"). By executing this Agreement, the Members ratify, confirm and acknowledge the actions of Matthew J. Kearney as organizer.


ARTICLE II
NAME


The business of the Company shall be conducted under the name of "LANTANA DEVELOPMENT LLC" or such other name as the Members may designate.


ARTICLE III
DEFINITIONS


The terms used in this Agreement with their initial letters capitalized, shall, unless the context otherwise requires, have the meanings specified in this Article III. The singular shall include the plural and the masculine gender shall include the feminine and neuter, and vice versa, as the context requires. Wherever used in this Agreement, unless another meaning is explicitly indicated by the context:


3.1 "AFFILIATE" or "AFFILIATED PERSON" means any of the following: (i) any Person that directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the specified Person, (ii) any Person that is an officer, partner or trustee of, or serves in a similar capacity with respect to, the specified Person or of which the specified Person is an officer, partner or trustee, or with respect to which the specified Person serves in a similar capacity, or (iii) any Person that directly or indirectly is the beneficial owner of ten percent (10%) or more of any class of equity securities of, or otherwise has a substantial beneficial interest in, the specified Person or of which the specified Person is directly or indirectly the owner of ten percent (10%) or more of any class of equity securities or in which the specified Person has a substantial beneficial interest.


3.2 "ADMINISTRATIVE EXPENSES" means expenses reasonably incurred by the Manager and its Affiliates during the operation of the Company directly attributable to administering the day to day operations of the Company (including financial and tax reporting, accounting and


payment of accounts and distributions) not to exceed the amount budgeted therefor in the Project Operating Budget without the prior unanimous approval of the Board.


3.3 "AGREEMENT" means this Operating Agreement as amended, modified or supplemented from time to time.


3.4 "BOARD OF GOVERNORS" or "BOARD" has the meaning set forth in Article XI hereof.


3.5 "CAPITAL ACCOUNT" has the meaning set forth in Section 8.1 hereof.


3.6 "CAPITAL CONTRIBUTIONS" means the initial capital contributions made by the Members as set forth in Exhibit A attached hereto as increased or decreased from time to time as provided for herein.


3.7 "CERTIFICATE" means the certificate of formation filed on behalf of the Company with the Delaware Secretary of State, as amended from time to time.


3.8 "CODE" means the Internal Revenue Code of 1986, as amended from time to time.


3.9 "COMMITTED CAPITAL" means the aggregate Capital Contributions to be made by the Members, in addition to the initial Capital Contributions to be made by the Members, as set forth in Exhibit A attached hereto.


3.10 "COMPANY" means the Limited Liability Company formed pursuant to the Certificate and subject to this Agreement.


3.11 "COMPANY PROPERTY" means the Project and all other real and personal property acquired and held from time to time by the Company and any improvements, and shall include both tangible and intangible property.


3.12 "COST" means, when used with respect to services furnished by the Manager or its Affiliates to, or on behalf of, the Company, the lesser of (i) the actual expenses incurred by such Manager and Affiliates in providing services necessary to the prudent operation of the Company, (ii) the price that would be charged by unaffiliated parties rendering similar services in the same geographic location, or (iii) the amount budgeted therefor in either the Preliminary Cost Statement or the Project Operating Budget.


3.13 "COVERED PERSON" means a Member (including the Manager and the Vice Manager) any Affiliate of a Member, any member of the Board of Governors, or any managers, members, officers, directors, shareholders, partners, employees, representatives or agents of a Member or its Affiliates.


3.14 "DEVELOPMENT EXPENSES" mean the actual expenses incurred by the Company under the direction of the Manager to develop the Project, including the "hard" and "soft" costs


-2-


set forth in the Preliminary Cost Statement and the salary, payroll and other expenses of the Manager to maintain an on-site manager and sales staff for the Project, all of which expenses shall not exceed the amount budgeted therefore in the Project Operating Budget without the prior unanimous approval of the Board. Overhead expenses shall be charged only if directly attributable to such services and shall be allocated based upon the amount of time personnel actually spend providing such services, or such other method of allocation as is acceptable to the Company's independent accountants.


3.15 "GOVERNORS" shall mean the members of the Board of Governors established pursuant to Article XI hereof.


3.16 "INITIAL LOAN DOCUMENTS" means those documents that are required by Omnibank, N.A. (the "LENDER") to be executed and delivered by the Company to secure at $1.5 million first deed of trust loan for acquisition and development of the Project, including but not limited to a promissory note, deed of trust, assignment of leases and contracts, UCC financing statements, all as more fully described in the Lender's correspondence to TIC dated March 6, 2000.


3.17 "INVOLUNTARY TRANSFER" means any transfer of title or beneficial ownership of an interest in the Company upon divorce, insolvency, default, forfeiture, foreclosure, court order, bankruptcy, an assignment for the benefit of creditors, or the like.


3.18 "LOT" or "LOTS" means one or more [RESIDENTIAL AND/OR RECREATIONAL] lots to be developed and sold by the Company as part of the Project.


3.19 "MEMBER" or "MEMBERS" means each of the Persons signing this Agreement as a Member, in such capacity as a Member, and each other person who shall be admitted to the Company as a Member.


3.20 "MEMBERSHIP INTEREST" or "INTEREST" means the Percentage Interest of a Member in the Company and the appurtenant rights, powers and privileges.


3.21 "NET CASH FROM OPERATIONS" means the gross cash proceeds from Company operations, which operations will predominately be the development and sale of Lots, less the portion used to pay or establish reserves for all Company expenses, operating and improvement expenses, debt payments, capital improvements, replacements, reserves and contingencies, all as determined by the unanimous vote of the members of the Board of Governors. "NET CASH FROM OPERATIONS" shall not be reduced by depreciation, amortization, cost recovery deductions, or similar allowances, but shall be increased by any reduction of reserves previously established. Net Cash From Operations shall not include Net Cash From Refinancings.


3.22 "NET CASH FROM REFINANCINGS" means the net cash proceeds from all refinancings of Company Property, less any portion used to establish reserves, all as determined by unanimous consent of the members of the Board of Governors.


-3-


3.23 "OVERHEAD EXPENSES" means the actual expenses incurred by the Manager or its Affiliates to manage the Project (other then Development Expenses) including salaries and expenses of Phillip C. Taylor and Joel Kaul and other Manager personnel, which expenses shall not exceed the amounts budgeted therefor in the Project Operating Budget. Overhead Expenses shall be charged only if directly attributable to such Project Management services and shall be allocated based upon the amount of time personnel actually spend providing such services, or such other method of allocation as is acceptable to the Company's Members.


3.24 "PERSON" means any individual, partnership, limited liability company, corporation, trust or other entity.


3.25 "PERCENTAGE INTEREST" means the percentage interest of a Member in the Company and shall be in the amount set forth on Exhibit A attached hereto and incorporated herein by reference, or as adjusted in accordance with Section 8.6 hereof.


3.26 "PRELIMINARY COST STATEMENT" means the Preliminary Cost Statement, relating to the Project, attached as Exhibit B hereto, which is intended to serve as the initial sources and uses of funds statement for the Project.


3.27 "PROJECT" means the Company's acquisition, development and sale of approximately 626 acres in Comal County, Texas to be developed, sold and known as Lantana Ridge, consisting of between 300 and 350 residential building sites; the property comprising the Project will be acquired in two phases, the first of which is expected to close on or about the date hereof (the "INITIAL CLOSING DATE") and the second of which is expected to close within one year from the date hereof (the "SECOND CLOSING DATE").


3.28 "PROJECT FEE" means the development fee totaling $250,000.00, half of which shall be paid to TIC upon the Initial Closing Date and half of which shall be paid to TIC on the Second Closing Date.


3.29 "PROJECT OPERATING BUDGET" means the three-year operating budget for the development and sale of the Project attached as Exhibit C hereto, which is intended to serve as the initial budget for the Project.


3.30 "PROJECT RESERVE" shall have the meaning ascribed thereto in Section 13.7 hereof.


ARTICLE IV
PURPOSE


The purpose and character of the business of the Company shall be to acquire fee interest in the Project upon such terms and conditions as the Board shall determine; to own, manage and develop the Project and to sell the Lots created in the Project for a profit; to enter into agreements pertaining to the ownership, financing, management, development and sale of Lots within the Project; to borrow funds for such purposes and to mortgage or otherwise encumber any or all Company Property and the Project to secure such borrowings; to sell or otherwise


-4-


dispose of Company Property, the Project and/or the Lots within the Project; and to undertake and carry on all activities necessary or advisable in connection with the acquisition, development, operating, management and sale of the Project or Lots within the Project.


ARTICLE V
NAMES AND ADDRESSES OF MEMBERS


The names and addresses of the Members are set forth on Exhibit A.


ARTICLE VI
TERM


The Company shall continue until dissolved as hereinafter provided or December 31, 2015, whichever is earlier.


ARTICLE VII
PLACE OF BUSINESS AND AGENT FOR PROCESS


7.1 Place of Business. The principal place of business of the Company shall be c/o Taylor Investment Corporation, Attn: Philip C. Taylor, 43 Main Street SE, Suite 506, Minneapolis, MN 55414. The Manager may from time to time change the location of the principal office of the Company and, in such event, the Manager shall give notice to the Members within twenty (20) days of the effective date of such change. The Manager may in their discretion establish additional places of business of the Company.


7.2 Agent for Process. The name and address of the agent for service of process on the Company shall be Philip C. Taylor, c/o Taylor Investment Corporation, 43 Main Street SE, Suite 506, Minneapolis, MN 55414.


ARTICLE VIII
INITIAL CAPITAL AND ADDITIONAL CAPITAL CONTRIBUTIONS


The capital of the Company shall be contributed by the Members and accepted by the Manager as follows:


8.1 Capital Accounts. A separate Capital Account shall be maintained for each Member in accordance with the provisions of Article 704(b) of the Code and any applicable regulations. The Initial Capital Contributions of the Members shall be as set forth in Exhibit A. The Capital Account of each Member shall be increased by (i) the amount of any contribution such Member makes to the capital of the Company pursuant to Section 8.8; (ii) the fair market value of property contributed by such Member to the Company, net of liabilities which the Company assumes or to which the property is subject; (iii) the share of Company income and gains (including income and gains exempt from tax) allocated to such Member under the provisions of Article IX; and shall be decreased by (iv) any distribution made by the Company to such Member pursuant to the provisions of Article X; (v) the fair market value of any property distributed to the Member by the Company, net of liabilities attached to such property which the


-5-


Member assumes or to which the property is subject; and (vi) the share of Company losses and deductions (including any expenditures of the Company described in Article 705(a)(2)(B) of the Code or treated as such expenditures pursuant to Treasury Regulation ` 1.704-1(b)(2)(iv)(i), allocated to such Member under the provisions of Article IX.


Upon the occurrence of a contribution to or distribution from the Company described in Treasury Regulations ` 1.704-1(b)(2)(iv)(f)(5) or as otherwise permitted, the Manager may, at the written request of Members representing at least one hundred percent (100%) of the Interests shall, increase or decrease the Capital Accounts of the Members to reflect a revaluation of Company Property on the Company's books, and, in that event, allocations of Company income, gain, loss and deduction (and items thereof) shall, for all purposes of this Section 8.1 be determined in the manner provided in Section 704(b) or Section 704(c) of the Code, as the case may be, and the Treasury Regulations thereunder.


This Section 8.1 and the other provisions of the Agreement relating to the maintenance of Capital Accounts shall be interpreted and applied in a manner consistent with Section 704(b) of the Code and any applicable regulations and the economic sharing of profits and losses of the Company by the Members. In the event the Manager shall determine that it is prudent to modify the manner in which the Capital Accounts or any increase or decrease thereto are computed in order to comply with Section 704(b) and any applicable regulations, the Manager may make such modifications, provided that such modifications are not likely to have a material effect on the amount distributable to any Member pursuant to Section 17.2 hereof upon liquidation of the Company.


8.2 No Right to Return of Contributions. The Members shall have no right to the withdrawal or the return of their respective contributions to the capital of the Company except to the extent set forth in Section 8.8, Article X and Section 17.2 hereof.


8.3 No Interest on Capital. No interest shall be paid by the Company on the Initial Capital or any subsequent contribution to the capital of the Company.


8.4 Loans to Company. A Member may lend money to the Company from time to time in excess of its contribution to the capital of the Company and any such loan shall not be treated as a contribution to the Capital of the Company for any purpose or entitle such Member to any increase in its share of the income, gain, losses, deductions, credits or distributions of the Company. The Company shall be obligated to such Member for the amount of any such loan, with interest at the rate of two percent (2%) over the prime rate announced by the Wall Street Journal (Midwest Edition) on the date that such loan is made.


8.5 Additional Members. Additional Members may be admitted to the Company only upon terms and conditions as may be established by written approval of Members holding one hundred percent (100%) of the Interests. Upon such consent and issuance of additional Membership Interests, Exhibit A shall be appropriately amended. Nothing in this Section 8.5 shall be construed to limit the effect of Section 14.1 with respect to the assignment or other transfer of Interests by Members.


-6-


8.6 Failure to Make Capital Contributions. In the event a Member fails to pay any installment of the Capital Contributions when due from such Member and such default is not cured within ten (10) days after written notice has been given to the Member by the Manager that such default has occurred, the amount of such Member's Percentage Interest shall be accordingly reduced to reflect the reduction in the Capital Contributions of such defaulting Member. After, and in addition to, the reduction in Percentage Interests required by the preceding sentence, such Member shall be subject to interest charges on the defaulted installment or installments of twelve percent (12%) per annum or the highest rate permitted by Minnesota law, whichever is less, which interest charges may be deducted by the Company from the capital contributions theretofore made by such Member in such Member's Capital Account, and the resulting reduction in such Member's Percentage Interest shall then be allocated among the remaining, nondefaulting Members in proportion to their respective Percentage Interests. This Agreement shall be deemed amended to reflect the revised Percentage Interests.


8.7 Transferee Succeeds to Transferor's Capital Account. If any Member transfers all or a part of an Interest in the Company, the transferee Member shall succeed to the Capital Account of the transferor Member to the extent of the Interest transferred, in accordance with Treasury Regulation ` 1.704-1(b)(2)(iv)(1).


8.8 Additional Capital. The Members shall not be obligated to make any additional contributions to the capital of the Company or to make any loan or pay any assessment to the Company, except that the Members shall make additional Capital Contributions to the Company up to the amount of each Member's Committed Capital set forth in Exhibit A to the extent the Manager determines the Company requires additional cash with respect to the Project and such additional capital contributions shall be made ratably by the Members in proportion to their Percentage Interests within ten (10) business days of the Members' receipt of notice from the Manager that such contributions are to be made (each such instance is hereafter a "CAPITAL CALL"). Each Capital Call shall be requested by the Manager in total Member increments of $50,000.00. If the Board at any time or from time to time, determines that the Company requires capital in addition to the Members' Committed Capital, the Manager may obtain such additional capital by borrowing in accordance with the provisions of Article XI.


8.9 Return of Unused Capital Contributions. In the event that any portion of the Members' Capital Contributions are not used by the Company or, in the judgment of the Board, are not committed by the Company in conjunction with the acquisition, development, operation, management or sale of the Project (including the funding of the Project Reserve) within three (3) months of the date any such Capital Contributions were made, then such unused portions shall be distributed to the Members, ratably in proportion to their Capital Contributions made as of the date of such distribution, wit ...